Pills and Partisans: Understanding Takeover Defenses

Corporate takeover defenses have long been a focal point of academic
and popular attention. However, no consensus exists on such fundamental
questions as why different corporations adopt varying levels of defenses
and whether defenses benefit or harm target corporationsí shareholders
or society generally. Much of the disagreement surrounding takeover
defenses stems from the lack of a fully developed formal analytical
framework for considering their effects. Our Article presents
several formal models built upon a common core of assumptions that together
create such a theoretical framework. These models incorporate
the reality that target corporate insiders have superior information
about the target but are imperfect agents of its shareholders.
They suggest that modern defenses enable target shareholders to extract
value from acquirers by empowering corporate insiders, but that takeover
defenses do not benefit society as a whole. They also help explain
why corporations with different characteristics may choose to adopt
varying levels of takeover defenses. Our findings have implications
for the longstanding debate about who is best served by state-level
control of corporate law and the desirability of increased federal involvement
in corporate law.